what is a company, company formation procedure

1. According to the definition of a company by the
Indian Act 2013;
‘‘A registered association which is an artificial legal person,
having an independent legal, entity with perpetual succession, a
common seal for its signatures, a common capital comprised of
transferable shares and carrying limited liability.’’
According to the British definition;
‘‘A company is a body corporate or an
incorporated business organization registered under the
companies act. It can be limited or unlimited company, private or
a public company, company limited by guarantee or a company
having share capital, or a community interest company.’’
According to the US legal definition;
‘‘A company can be a corporation, partnership, association, joint-
stock company, trust fund, or organized group of persons,
whether incorporated or not, and (in official capacity) any
receiver, trustee in bankruptcy, or similar official, or liquidating
agent, for any of the foregoing.’’

2. Key Features of a Company
The key features and characteristics of a company are as follows;
• Artificial person
The law treats the company as a legal artificial person because it has its name
and bank accounts. It can also own property under its name, file a lawsuit
against other companies or personals, or be partnered up with other
companies. It performs all of the activities that a person can legally do; a
company can do it well. Therefore, it acts as an artificial individual.
• Separate Legal Entity
When we say legal entity, what it means that it’s completely independent of its
people who control its operations. In other words, the company won’t be
responsible if its members don’t pay their debt. The same goes for the
company as well; that the members don’t have to pay for the debt of the
company, if it’s unable to pay to its creditors.
• Incorporated Association
A company starts its business operations when it is registered by the law and
under the ordinance of the companies act. The registration process of a
company is lengthy; it should have a memorandum of association, board of
directors, share prices and shareholders, a name, office, phone number,
address, and other legal documentation.

3. • Limited Liability
The liability of shareholders is limited to their share price only; it
is in the limited companies by share. On the other hand, in the
case of limited companies by guarantee, where the share of
contributors is like an asset in the company; if the company
goes bankrupt, then the shareholders have to pay a small
amounts to cover up the loss of the company.
• Common Seal
As we know that a company acts as an artificial legal individual,
therefore, it has a stamp or seal with the name and address
engraved on it. This stamp would be like the signature of the
company. The stamp and company’s seal is used for the
verification and authorization of various documents.
• Perpetual Existence
Unlike proprietorship, partnership or any other type of business,
a company doesn’t depend upon its owners, board of directors,
shareholders, or employees. Many people come and go in the
company, but it stays.

4. Kinds of
Companies
According to mode of incorporation
Statutory Company
Registered Company
According to number of members
Private Company
Public Company
One person Company
According to liability of members
Company limited by shares
Company limited by guarantee
Unlimited Company

5. Statutory Company eg. LIC, RBI,
UTI, FCI etc.
 Incorporated by a Special Act passed by Central or
State legislature
 Such Companies carry on some business of national
importance
 Exempted from having MOA or using 'limited' word in
their name.
 Their audit supervision and guidance by CAG and
Annual reports are to be placed before Central or State
Legislature
 Governed by their Special Act but Companies Act is
also applicable in so far as its provisions are not
inconsistent with the provisions of Special Act

6. Registered Companies
 These are the companies which are registered under the
Companies Act 2013 or earlier Companies Acts.
 Most of the companies are formed this way
 If some Insurance, Banking or Electricity Supply companies are
incorporated under the Companies Act, then on operational
matters they will be governed by their Special Acts and on other
matters by the provisions of Companies Act.
 On the basis of no. of members, registered Companies can be #
private,# public or #one person Company
 On the basis of liability of members, registered Companies can be#
limited by shares, #limited by guarantee or #unlimited companies
TPDDL i.e. Tata Power Delhi Distribution Lmt.- it an electricity supply
company
Bhatti Axa Life Insurance Company Lmt.-it is an insurance company.
Both of them are registered companies and therefore end with word
limited. But on operational matters they are governed by the
Electricity Act, 2003 or the Insurance Act, 1938 respectively

7. Private Company ,Sec2(68)
 Restricts the right of members to transfer its shares
 Limits the number of members minimum 2 to
maximum 200
 Prohibits any invitation to public to subscribe it's
securities
 These companies must add "Private" word with its
name.
 These companies enjoy certain exemptions and
privileges

8. Public Company ,Sec.2(71)
 Shares are freely transferable
 Minimum membership required is 7 but
maximum no limit
 Can invite public for subscription of its
securities
 Subsidiary of a public company will be
deemed to be public company (even when
the subsidiary is a private company and has
those three restricting clauses in its AOA)
 These companies are required to comply
with lot of formalities and procedures

9. One Person Company, Sec.2(62)
 Has just one member who shall be a natural person
but it is necessary to indicate name of another
person (nominee)who shall become the member
incase the only member dies or is incapacitated
 Necessary to mention the words 'One Person
Company" in brackets below the company's name
wherever printed/engraved/affixed
 Always incorporated as a private company. It may be
limited by shares, or limited by guarantee or an
unlimited company

10.  Such company enjoys certain additional exemptions like-
no. of directors can range from 1 - 15, no need of their
rotational retirement, no compulsion to conduct board
meetings if there is just 1 director, no need to hold AGM/
EGM, the Financial Statements may not include cash flow
statement and may be signed by just 1 director, BOD report
is not too detailed, Annual Return can be abridged ;
financial statements can be filed with ROC within 180 days
of closure of financial year etc.
 This OPC status and concessions will be withdrawn if it's
paid up share capital exceeds 50 lakhs or average annual
turnover during preceding three consecutive financial
years exceeds 2 crores. In such a case, the OPC is required
to convert itself,within next 6 months, into a private or a
public Co and take necessary steps such as - alteration of
its AoA and MoA for making changes incidental to
conversion, give notice to ROC(within a period of 60 days
of conversion) informing it of cessation of its OPC status
and conversion into private or public company as the case
may be.

11. Companies limited by shares
 In such companies liability of members is limited by the
memorandum to the amount remaining unpaid on shares held
by them
 This liability can be enforced at any time during the existence
of the company or during the winding up of company
 Most of the companies in India belong to this category
 Such companies are also known as limited liability companies
 If shares are fully paid, the liability of members will be nil

12. Companies Limited by guarantee
 In such companies, liability of members is limited by
memorandum to the amount guaranteed by them
(such amount as they have respectively undertaken
to contribute to assets of the company to meet the
deficiency at the time of its winding up)
 This liability/ guarantee can be enforced(demanded)
only at the time of winding up and not before
 Non- trading companies formed for the promotion of
art, science, commerce, sports, culture etc. are
incorporated as guarantee companies. Eg. Chambers
of Commerce, sports clubs, trade associations


13.  Memorandum of Association of such
companies states what amount each
member has guaranteed and this
amount may differ from member to
member
 Such companies may or may not have
share capital. If it has share capital,
liability of members will be two fold
.i.e. they are liable for amount
remaining unpaid on shares as well as
amount payable under guarantee

14. Unlimited Companies
 Such companies have no limit on the liability of its members
i.e. their liability may extend to their personal property to
pay off the liabilities of the company
 Memorandum of such companies must state that liability of
its members is unlimited
 Liability of members is enforceable only at the time of
winding up
 Every member is liable to contribute in proportion of his
interest in the company

 Such companies are very rare .Eg. Nova Scotia (Canada)
Unlimited Liability Company, Cyber Ventures

15. Government Company eg. Hindustan
Machine Tools Ltd., State Trading
Corporation of India Lmt.
 A Govt. Company is one in which not less that 51%
paid up share capital is held singly or in combination
by the Central Govt and/ or one or more State govts.A
subsidiary of a Govt. Co. is regarded as a Govt . Co.
 It is to be registered under the Companies Act and
could be incorporated as a 'public' or a 'private'
company.
 These companies are governed by the Companies Act
like any other limited company but may be granted by
the Central govt exemptions from application of
certain sections of the Companies Act or applications
of such provisions with certain
modifications/exceptions/adaptations

16.  Special provisions as regards audit. CAG of India appoints /
reappoints the auditor of such co; CAG can also give
directions to such auditors regarding manner of audit; CAG
can get supplementary test audit of such Co. being
conducted by persons appointed by him; auditor is required
to submit copy of his audit report to the CAG ;and the CAG
can give his comments on that report which shall also be
placed before the annual general meeting (AGM) along with
the audit report.
 Special provisions as regards annual reports. An Annual
Report on working and affairs of such company shall be
prepared within 3 months of AGM (where audit report
stated above was laid) by the Central govt( if it is member of
such govt Co ) or by the member State Govt (if Central govt
is not member of such Co).Then the concerned govt (CG
and/or SG) shall lay before both its Houses (Parliament or
Legislature as the case may be)-the annual report( prepared
by the CG/SG as the case may be) + copy of audit report +
comments of CAG.

17. Privileges/exemptions of a private co.
 Only 2 persons may form themselves into a private
co.
 May work with only 2 directors
 It can allot shares without receiving the minimum
subscription
 It is not required to prepare and file prospectus
with the Registrar
 Directors of a private company are not required to
retire by rotation. All its directors can be
permanent.
 It is not required to appoint independent directors,
woman directors, small shareholders directors etc.

18.  It may by its AOA, provide special
disqualifications for appointment of
directors .
 No restriction on payment of remuneration
to directors, managing directors etc.
 Exempted from constituting committees like
Audit Committee, Nomination and
Remuneration Committee.
 Exempted from Secretarial Audit
 Not required to rotate auditor/ audit firm
 Unless AOA provide for a larger no., quorum
for general meeting -2 members personally
present

19. Private Company vs Public Company
PRIVATE COMPANY PUBLIC COMPANY
Minimum no. of members – 2 Maximum
no. of members-200
Minimum no. of members -7
Maximum no. of members- No limit
There must be restrictions on transfer of
shares of the company.
No restrictions on transfer of shares.
Any invitation to public to subscribe for
any securities of the company is
prohibited.
A public company can invite public for
subscription of its securities.
It can issue securities only through
private placement, or by way of rights
or bonus issue
It can issue securities to public through
prospectus, private placement or by way
of rights or bonus issue
It can allot shares without receiving the
minimum subscription
It cannot allot shares without receiving
minimum subscription
A private company must have atleast 2
directors
A public company must have atleast 3
directors
Directors are not required to retire by
rotation. All its directors can be
permanent.
Atleast 2/3 directors of a public
company shall be rotational directors .
It is not required to appoint
independent directors.
A public company which is listed or
otherwise prescribed must appoint
independent directors

20. Private Company vs Public Company
PRIVATE COMPANY PUBLIC COMPANY
It may by its AOA, provide special
disqualifications for appointment of
directors .
It cannot prescribe additional
disqualifications in its AOA for
appointment of directors.
No restriction on payment of
remuneration to directors, managing
directors etc.
Overall maximum managerial
remuneration is fixed at 11% of annual
net profits of a public company.
Exempted from constituting committees
like Audit Committee, Nomination and
Remuneration Committee.
Public companies ( listed/prescribed)
are required to constitute Audit
Committee, Nomination and
Remuneration Committee
Exempted from Secretarial Audit Public companies( listed/prescribed) are
required to get Secretarial audit by a
practicing Company Secretary
Not required to rotate auditor/ audit
firm
Public companies ( listed/prescribed)
required to rotate auditor/ audit firm
Unless AOA provide for a larger no.,
quorum for general meeting -2 members
personally present
Quorum shall be 5 to 30 members
personally present depending upon the
number of members in the co.
Must have word ‘Pvt./Private’ in its Name must end with word